Deal For Facebook Shares Leads To Suit Vs. SecondMarket

A firm buying up private shares in Facebook Inc. stock is suing a popular trading platform, saying it botched a deal and cost it more than $9 million.

While it remains to be seen how it plays out, the suit comes amid growing interest in private-shares trading of the hottest pre-IPO tech companies, not to mention scrutiny from another party interested in that activity — the Securities and Exchange Commission.

Felix Investments, which operates two funds devoted exclusively to buying up Facebook shares from employees and other shareholders, says it sealed a deal with Facebook engineer Karl Voskuil in January 2010 to purchase 75,000 shares he owned for about $2.5 million, or $33 per share.

The parties began executing the deal through SecondMarket, a shares-trading platform that has become the center of much of the frenzy over shares in hot tech companies such as Facebook, Twitter Inc., Zynga Inc. and others.

Felix, which operates funds called Facie Libre Associates I and Facie Libre Associates II – a Latinate rendering of “Facebook” – alleges that in March, SecondMarket’s in-house counsel released signatures from Facebook officials authorizing the transaction, and Felix wired the final installment of its purchase price to Voskuil on March 26, 2010, the deadline for the deal to close. Facebook has right of first refusal on any proposed sale of its employees shares.

Felix said it had made 20 previous deals for Facebook stock using SecondMarket, and in every case the release of the Facebook officials’ signatures was the final step required to close the deal.

But the lawsuit (read it here), filed in the New York State Supreme Court, alleges that SecondMarket had not obtained final approval of Facebook’s counsel or delivered a required legal opinion to Facebook. That legal opinion was delivered the next day, one day after the 60-day period to complete the deal had elapsed, according to the lawsuit.

For weeks after, the lawsuit alleges, Felix Investments sought documents to confirm the transaction had closed and was “stonewalled” at every turn. Three months after the closing date, SecondMarket informed Facie Libre that the deal had in fact not closed.

Felix then tried to re-do the deal but was told Facebook had instituted a new insider trading policy in April that prohibited Voskuil from selling his shares to company outsiders.

More than a year after the supposed closing date, Voskuil returned the $2.4 million that Felix had given him for his shares.

Felix claims it lost more than $9 million because of the alleged glitch – the difference between the value of the 75,000 shares it thought it had bought from Voskuil for $2.4 million, and the current value of those shares, which the lawsuit says is more than $12 million as Facebook’s private valuation has continued to rise.

Voskuil now is back in possession of his shares – which are worth several times more than they were when he first agreed to sell them to Felix.

Facebook, SecondMarket and Felix Investments declined to comment. Voskuil could not be reached for comment.

Felix Investments is one of several firms that have sprung up in the last two years aiming to buy shares in Facebook, Twitter, Zynga and others. These firms, often more akin to hedge funds or Wall Street brokerage houses than traditional venture capital firms, placed early bets that these companies valuations’ would continue to rise, and have kept buying shares as they did just that.

So far, the strategy appears to have worked. Facebook’s valuation has risen from a reported $50 billion in January, when Goldman Sachs participated in a $500 million investment in the company, to more than $80 billion on the thinly-traded secondary market this week, according to auction information from Sharespost, another secondary exchange.

The new lawsuit also comes amid an ongoing effort by the SEC to get a closer look at secondary trading platforms and company-specific funds.

In December, the New York Times and The Wall Street Journal reported that the agency was looking into the trading of private-company shares and appeared to be focusing partly on funds that had sprung up for that purpose. The agency sent letters to several participants in the trading, seeking information about how such funds were valuing shares of the private companies, among other matters.

SecondMarket said in January that it had been contacted by the SEC in the inquiry.

Frank Mazzola, principal of Felix Investments, said then that he had communicated with the SEC, saying. “It’s really not an investigation. It’s an inquiry, and it’s a good thing,” he said.

In October, VentureWire reported that New York-based Felix Investments’ funds, Facie Libre I and Facie Libre II, were targeting $25 million each.

The firm also created a Twitter-focused fund, called Pipio Associates I LLC, targeting Twitter shares at a valuation of $4.1 billion, according to an email the firm sent to prospective investors that was reviewed by VentureWire in January. Pipio is Latin for “tweet.”

The firm, in keeping with the frenzy over private company stock in recent months, went heavy on the hype in its letter to potential investors in the fund, which was reviewed by VentureWire: “If you do not own stock in Twitter already it is a must. If you already own Twitter you need to add to your position. There are two absolute must have positions – Facebook and Twitter! This is the first Twitter stock we or anyone else has had in the past six months and like Facebook it will continue to trade up in price rapidly!”

UPDATE: This article was changed to reflect the fact that SecondMarket was contacted by the SEC in relation to the agency’s inquiry into private-shares trading, which was first reported in December.

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